Don't Follow Elon Musk's Lead, Stay Away from SolarCity

Shares of SolarCity (SCTY) have taken a beating ever since the company released its quarterly earnings report. I always found SolarCity overvalued and with the company slashing its installments guidance, I think it will have a difficult time growing into its present valuation. Yes, even after the 50% in the last few weeks, I think SolarCity is overvalued and has more room to fall.

Elon Musk recently increased his stake in SolarCity to 21% after he confirmed a multi-million dollar purchase of the shares after the crash. However, I don’t think investors should take this as a sign of better things to come because Musk has been wrong before.

Musk also bought SolarCity’s shares when it crashed to $40. The shares have lost 30% value since Musk’s buy at $40 and there’s no reason to believe that won’t happen again.

Legendary short seller Jim Chanos recently called SolarCity a financing scheme and shorted the stock. The decision has proven to be a great one as shares of SolarCity has widely underperformed since then. The company’s troubles aren’t about to end to as Investment Tax Credit (ITC) is expected to reduced from 30% to 0% by the end of 2016. ITC makes the installation of solar panels feasible for consumers whilst allowing SolarCity to sustain its business model. SolarCity leases solar panels to customers at a very cheap price and charges them for it for many years to come.

The strategy may seem good but I found it iffy as SolarCity hasn’t been able to turn profitable because of high costs. However, with ITC being slashed to 0%, I can see SolarCity’s business crumble. Leasing solar panel will not be feasible enough for SolarCity and the company will eventually have to increase prices. Falling installation costs have been a great driver for the entire solar industry. Hence, an increase in prices can have a huge negative impact of installations going forward.

I’d be worried if I was long SolarCity as the company is already underperforming on the installations front. The future looks dark for the company’s business as it doesn’t have enough cash to expand and is already highly leveraged.

Conclusion

I don’t think SolarCity will ever turn profitable. The company is highly leveraged and will run out of cash to expand. The stock has taken a deserved beating, but I think it has more downside to offer. Unless there’s an extension for ITC, I think investors should not follow Elon Musk into buying the shares of SolarCity.